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President-elect Donald Trump has made many sweeping campaign promises to slash taxes, but how much of his plan may be implemented remains uncertain, even though the Republicans are taking control of both houses of Congress.
Trump has vowed to impose a universal baseline tariff on all U.S. imports and a 60% tariff on all U.S. imports from China, make permanent the largest tax code overhaul in nearly three decades, reduce the corporate income tax rate from 21% to 20% or 15% (potentially only for domestic production) and tax major private university endowments. He has also pondered replacing the income tax with tariffs. Trump also made a slew of proposed cuts aimed at lower-income taxpayers, such as: exempting tip income, Social Security benefits and overtime pay from taxation; creating a deduction for auto loan interest and a tax credit for family caregivers; as well as expanding the child tax credit to a $5,000 universal credit.
The Tax Cuts and Jobs Act (TCJA), passed by a majority-Republican Congress in 2017, is now more likely to be further extended or made permanent, creating a major boost for the wealthy. The overhaul whittled corporate tax rates and changed how the U.S. taxes the profits of U.S. multinational corporations, while temporarily lowering personal income and estate taxes. But significant obstacles to making them permanent persist.
These proposed changes come with a hefty price tag. The nonpartisan Congressional Budget Office (CBO) estimates that extending the Trump cuts for the next decade would fatten the deficit by $4.6 trillion. The individual tax cuts are more likely to be approved than the expensive measures aimed at boosting the richest taxpayers. As Republicans take control of the House, the first likely topic for debate will be the extension of the TCJA and how to fund it without ballooning the deficit, a Herculean task that may give pause even to GOP lawmakers.
Trump has said that imposing tariffs on foreign goods entering the U.S. will finance tax cuts. A 10% universal tariff would raise an estimated $2 trillion over 10 years, and a 20% tariff would potentially generate $3.3 trillion1 in a decade, which would not be enough to offset the revenue losses of making the TCJA permanent. According to the Penn Wharton Budget Model (PWBM), Trump's proposals would increase primary deficits by $5.8 trillion over the next decade on a conventional basis, and by $4.1 trillion on a dynamic basis that includes economic feedback impact. The corporate tax cut has so far failed to spur economic growth, as backers hoped, by investing savings in new equipment, facilities and workforce.
Moreover, tariffs will likely spike prices of everyday goods and weaken the spending power of U.S. consumers, hitting hardest those who voted for Trump because he claimed his policies would curb inflation and improve living standards.
Bottom line: Trump has only four years to push for massive changes that may not justify their cost, and even Republicans may be weary of the expense. Only Congress has the power to change laws, and even a GOP-led government will have to consider concessions for such wide-reaching changes with a focus on the richest taxpayers and the potential to harm the economy. Amid the lingering uncertainty, investors should consult their financial advisors on how to prepare for 2025, when we may experience the potential for the most significant changes to tax law in a decade.
1The Tax Foundation.
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